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This article was originally published as part of the Management of Voluntary Organisations package produced by Croner Publications Ltd, (in 1999) and copyright resides with them. It was written by Dr Gareth Morgan, a partner with The Kubernesis Partnership, York. He works with a wide range of small/medium charities, both as an independent examiner and as a consultant on accounting and funding issues. Here he discusses and compares independent examination and audit.

Please note that this pre-dates various revisions to the charity SORP – see further resources links at the end.

Most charities now have a reasonable awareness of the new charity accounting regulations and the SORP, but are much more hazy when it comes to arranging for audit or other scrutiny of the charity’s accounts. For many trustees it is regarded as an unexciting subject and the only issue is finding someone to do it.

This is quite worrying, because the Charities Act 1993 introduced major new requirements in this area – requirements which many trustees, and even some professional accountants, have yet to address. The result is that some charities are having their accounts returned by the Charity Commission for proper independent examination or audit. Similar requirements were also introduced in Scotland, a year earlier.

The Past

Charitable companies have long been subject to audit rules under the Companies Acts, but until the Charities Act 1993 and the new regulations in Scotland, other charities were largely free to make their own choices about audit.

Previously, larger charities generally opted for a full professional audit, but many smaller charities chose an “informal audit” whereby someone with modest accounting knowledge was asked to look over the books, and sign his or her name at the end of the accounts. These informal audits were often very haphazard, with no indication at all of what the “honorary auditor” had actually done. Even with accounts prepared by professional accountants, the accountants’ report often said only “these accounts have been prepared from the books and vouchers presented to us” with no opinion as to their completeness or accuracy.

The New Rules

To address this confusion, the new rules brought in two options: smaller charities can opt for an independent examination; above a certain level a full audit is required. Independent examination allows smaller to medium charities to have their accounts scrutinised by a process that is less than a full professional audit, but which is nevertheless sufficiently thorough that charity trustees and supporters can have some confidence in the outcome.

Independent examination is an option for unincorporated charities with income in the following ranges. Note that these thresholds apply provided there is no other requirement for audit (for example, no requirement in the governing document or a condition of a funder for a full audit to take place). Also the largest income or expenditure for any of the last three years determines the minimum requirement.

* Note: see updated table at bottom of page

Minimum permitted scrutiny of accounts

England and Wales: Income / expediture level

Scotland: Income / expenditure level

Approval of accounts by trustees only

£0-£10,000

Not applicable

Independent examination

£10,000-£250,000

£0-£100,000

Full audit

£250,000 or over

£100,000 or over

Independent Examination versus Audit

Although independent examination represents a lesser form of scrutiny than a full audit, it is still much more demanding than the “informal audit” which many small charities had in the past.

The two main differences between independent examination and audit relate to (a) who can act and (b) the nature of the report. However, in both cases the framework is laid down by law, and there are many issues that must be considered in a charity audit or independent examination which would not be required in a commercial audit: for example, checking for proper use of restricted funds. As well as following the regulations, in England and Wales, an independent examiner must comply with the Directions of the Charity Commission. It follows that both auditors and independent examiners must have specific charity knowledge.

If an audit is required, the charity’s trustees must appoint a registered auditor (it is not sufficient just to use a qualified accountant). However, an independent examiner is defined as an independent person who is reasonably believed by the charity trustees to have the requisite knowledge and practical experience to carry out a competent examination of the accounts. No specific qualification is required, but clearly the person must have a good understanding of accounts and charity accounts in particular. The issue of independence is also very important: some “informal audits” in the past have been carried out by funders, landlords, or close relatives of trustees, where there is clearly insufficient independence.

As regards the report attached to the accounts, an audit report under the Charities Act 1993 will (if unqualified) confirm that the accounts give a “true and fair view” (or are “properly presented” in the case of small charities doing receipts and payments accounts).

By contrast an independent examiner’s report provides a “negative assurance”. The independent examiner declares that no evidence was found of lack of accounting records, of accounts failing to comply with the records, of accounts failing to comply with the Act, nor of other matters that need to be disclosed. However, such a declaration can only be made after following 12 stages of Charity Commission directions, so for most smaller charities, an independent examination provides a very effective scrutiny, which goes much further than the “informal audits” of the past, but which can be carried out without needing a registered auditor.

Choosing an Independent Examiner

Finding a registered auditor with charity experience is usually just a matter of approaching some suitable firms of accountants, but finding an independent examiner can be harder. Some accountancy firms offer independent examinations at slightly less cost than an audit, but there are also many other independent examiners: professionals in other fields with a good knowledge of charity finance; retired accountants; bankers; management accountants; staff of community accountancy projects and so on.

However, in each of these categories there can be certain concerns about the issues of “requisite ability” and “practical experience”. Even amongst accountants, only a few firms specialise in charities, and others can easily be caught out by all the new requirements. Where people are acting informally as independent examiners there is wide ignorance of the new regime: for example some “informal auditors” are doing just as they did in the past but simply putting “independent examiner” after their name with no reference at all to the requirements of the Act.

To help address these issues, a new Association of Charity Independent Examiners has been formed (ACIE). Founded in January 1999, ACIE aims to bring together all those who act as independent examiners of charity accounts, by providing a range of support, newsletters, training, and professional updating, as well as helping charities in the selection of examiners. ACIE is governed by a Council that brings together professional accountants and lay examiners from across the UK, and within the first six months the membership of the Association has grown to more than 180. The principles of an Association to support examiners have been warmly welcomed by the Charity Commission and various voluntary sector umbrella bodies.

The Association was founded on the basis that anyone interested in the subject can join as an associate member, but a full membership scheme has just been launched, which will allow those with appropriate experience to be awarded the qualification MACIE. In due course it seems likely that charity trustees will look for this in choosing an examiner.

Reproduced with permission from Croner’s Voluntary Organisations’ Briefing, part of the Management of Voluntary Organisations package. This is available on 10 days no obligation trial. For more details contact Croner Publications Ltd on 020 8247 1176 or see the Publishers page.

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